The Cladding Tax Proposal

Wednesday 7 July 2021

Written by Yedidya Zaiden

The Cladding Tax Proposal

The Cladding Tax Proposal

The issue of unsafe cladding was brought to the forefront again when in May this year, just a month before the fourth anniversary of the Grenfell Tower disaster, a fire broke out at a residential block in Canary Wharf. Thankfully, that fire was brought under control, however, it was a stark reminder that many buildings still have to deal with the costly removal of dangerous cladding. 

The government has pledged a £5 billion package of remediation of unsafe cladding on high-rise residential buildings, alongside wider support. However, it believes that it is right that residential property developers, who will benefit from the restoration of confidence to the housing market, should help fund the significant costs associated with the removal of unsafe cladding. 

To achieve this, two new taxes have been proposed. The ‘Gateway 2’ Developer levy will be applied when developers seek permission to develop certain high-rise buildings and a Residential Developer Tax which will apply to property development companies who report profits of over £25m. These taxes are likely to come into force in 2022. 

Comments made by Kate Henderson, National Housing Federation chief executive, reflect what I believe are the thoughts of many in the industry. She said: ‘We are supportive of anything that aims to recover costs from those responsible and will look forward to seeing the detail of a new development levy. It is important that any levy does not simply get passed on, increasing the cost of affordable homes that not-for-profit housing associations purchase from developers, and future homes bought by individuals on a shared ownership basis.’ 

From the perspective of an accountant and business advisor, I would argue that the government’s proposals are flawed. I would argue that they do not recover costs from those who installed the faulty cladding, they do not adequately assist those affected by the crisis, and I question whether they will even raise sufficient funds. 

Penalising developers of future buildings allows those who installed the faulty cladding not to have to deal with the consequences of their actions. Those developers may argue that they were fully compliant with safety standards set by the government. If this is the case, then it is the government that should be footing the bill.  

Property developers who are hit with these levies may be tempted to simply pass on the tax by charging higher prices for future homes they build. In addition, the ability of housebuilders to develop cheaper homes is often funded by the profits they make on other ‘high end' projects. A consequence of the cladding tax may very possibly be a lack of affordable housing, with those who can least afford it ultimately paying the price.   

Many leaseholders have found themselves directly impacted by the faulty cladding. Many are unable to sell their flats as lenders who are concerned that the properties may be unsafe or could potentially require expensive remedial work will not lend against the properties.  

Under government plans, leaseholders in buildings above 18 metres tall will not have to pay anything towards the costs of removing dangerous cladding. Those who own flats in blocks between four and six storeys high will have costs capped at £50 a month per property. 

However, the schemes are still to be implemented and freeholders have already begun to issue demands to leaseholders to cover their share of remediation work. In addition, they are having to find funds for work not covered by the schemes such as the costs of internal work, repair of balconies and increased insurance premiums. 

Leaseholders are also facing a further hidden cost. Those who are able to move out of their flats in buildings affected by cladding are having to pay an additional 3% stamp duty on the purchase of their ‘second’ homes. Under current legislation, if the first home is sold within three years, then the additional stamp duty can be reclaimed. However, given that by the time grant applications are processed and contractors engaged, this window may have closed, the additional stamp duty will not be refunded. HMRC have said that if the delay in selling the first home was ‘outside your control’ you may still be able to have the additional stamp duty refunded, but they only give examples of Covid-19 or a where a sale is blocked by a public authority, so it is unclear whether this will apply in these circumstances. 

As far as raising the necessary funds to pay for the works, the trade press has actually branded the proposals as ‘laughable’ because, given the required profit levels, most contractors will not be subject to the levies. And as costs rise, the government remediation package may face a significant shortfall. 

If you are a property developer or a residential leaseholder and you would like a say on the proposals, the consultation which runs until 22 July 2021 can be accessed by clicking here.  

If you would like to discuss any aspect of this article or for any other tax, business or accounting advice, please click here to email Yedidya Zaiden directly or alternatively click here to get in contact with the team today.

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